Producers face revenue challenges despite border closure
More challenges beckon on AfCFTA kick-off — Investment analysts
By Nkiruka Nnorom
THERE are indications that the government’s policies on palm oil industry have failed with leading companies in the industry recording significant declines in revenue despite massive government incentives.
It will be recalled that the Federal Government, in an effort to boost local production of palm oil, had included palm kernel, palm oil products and vegetable oils as part of the items banned from accessing forex for importation.
Also, in August, 2019, the FG closed the land borders while enforcing its ban on importation of the palm oil products. The government subsequently, disbursed about N30 billion to local palm oil producers to boost their operations.
However, the interventions have failed to positively impact the producers as the two palm oil producing companies quoted on the Nigerian Stock Exchange (NSE) Okomu Oil Palm Plc and Presco Plc – recorded revenue decline in the year ended December 31, 2019.
Analysis of the full year financial report of the companies shows that they posted combined revenue of N30.48 billion, a 26.7 percent decline compared to N41.6 billion recorded in the same period in 2018, a development the operators attributed to weak global Crude Palm Oil (CPO) price and imposition of extra import duty on palm oil importation by India.
Average crude palm oil price in 2019 stood at $575 per metric tonne (MT) compared to $639/MT in 2018, a 10.02 percent decline.
Also, their profit before tax (PBT) took a downward turn, declining by 19 percent to N13.5 billion from N16.66 billion in 2018.
Meanwhile, investment analysts and the management of the companies have said that the commencement of African Continental Free Trade, AfCFTA, later this year may further hurt their revenue.
“We believe half year 2020 (H2’20) might be a bit competitive, depending on the outcome of the kick-off of the Africa Free Trade Continental Agreement (AfCFTA) which should grant access to other players within the continent to Nigeria’s local market,” said analysts at United Capital Plc.
Graham Hefer, Managing Director/Chief Executive Officer, Okomu Oil Palm Plc, told Financial Vanguard that although the companies benefitted from the border closure, the decline in global palm oil, especially between Q3’19 and Q4’19, resulted in the revenue decline witnessed during the year.
He added that AfCFTA take-off could be disastrous on the economy if measures are not put in place to ensure smooth trade within the continent.
“If we could not get import right as ECOWAS countries, I hate to see what will happen when 54 countries begin to trade together. As far as we are concerned, it is going to be a disaster,” he stated.
He, however, said that border closure has helped the companies to reduce their huge stockpile of unsold goods, which was very burdensome prior to August 2019 land border closure.
The Central Bank of Nigeria (CBN) governor, Mr. Godwin Emefiele, had, as part of the efforts to revitalise the sector, announced that any company caught smuggling palm oil and its by-products into the country would be blacklisted from all banking businesses and would also be blocked from the foreign exchange market.
He said that this also included those who tried to smuggle in palm oil as “hydrogenated vegetable fats”.
The apex bank said that for those coming newly into the palm oil business, credit facilities would be extended to them through their banks and that ‘out-grower’ schemes would also be organised.
He stated: “We want to make everybody understand how serious we are and also to emphasise that what we are doing to stop the importation of oil palm into Nigeria is a presidential directive that must be adhered to.
“Doing this also means that while we are stopping the importation of palm oil, we must do all possible to ensure that palm oil production is aggressively increased in Nigeria.”
According to the World Bank, Nigeria is the largest consumer of palm oil in Africa, driven by its huge population.
In 2018 alone, Nigeria was reported to have consumed about 3.0 million metric tonnes (MT) of fats and oils, with palm oil accounting for 44.7 percent (1.3 million MT).
In the same period, production stood at 1.02 million MT, resulting in a supply shortfall of 0.32 million MT.
Financial state of companies
Financial Vanguard’s analysis of the financial results of the leading companies in the industry shows that Presco recorded the highest revenue decline at -6.8 percent to N19.88 billion from N21.34 billion in the previous year.
The company also posted 12.7 percent decrease in pre-tax profit to N5.52 billion against the N6.32 billion recorded in the corresponding period in 2018.
Okomu Oil’s revenue fell by 3.3 percent to N19.6 billion from N20.26 billion in 2018. The pre-tax profit also nose-dived by 22.8 percent to N7.98 billion from N10.34 billion in the previous year.
Speaking to Financial Vanguard on the development, Hefer said: “The border closure had a very good impact on our operation. In the first two quarters of 2019, there was hardly any income; there was a lot of stock. We were not able to sell anything because there was a logjam of illegal oil in the market as a result of the porous borders.
But in the third quarter when the Federal Government closed the land borders, there was stocks decline and revenue began to come in because we were able to sell our products.
“However, decline in price of CPO and imposition of extra import duty by India, which is the largest importer of crude palm oil in the world impacted negatively on the market price. We do not have local price in Nigeria; we are still linked to the global price. So, irrespective of what happens locally, the world market price still impacts on us.
“If you look at the global price in December 2018 compared to last year, there was a decline in world market price of CPO.”
In their reaction, analysts at United Capital attributed the weakening revenue to the activities of smugglers as well as more competitive substitutes, especially in the first half of 2019 (H1’19) prior to border closure in August.
They stated: “The financial performance of the companies improved in Q3’19, as the closure of land borders propped up demand for locally produced crude palm oil. However, their performance in Q4’19 failed to track Q3’19’s numbers, as both players recorded declining revenue. In total, full year 2019 revenue and profits fell year-on-year.
“Over 2020, we see a potential for upside in sales volume, especially from the domestic segment, on the back of our expectation for controls around the land borders to remain strict in 2020 and high global crude palm oil prices. However, we believe H2-20 might be a bit competitive, depending on the outcome of the kick-off of the Africa Free Trade Continental Agreement (AfCFTA) which should grant access to other players within the continent to Nigeria’s local market,” they said.
Explaining the reason behind the lower revenue, analysts at Cordros Capital said: “In our H2’19 agriculture sector update, we rehashed the case for a stronger crude palm oil (CPO) price, which was helmed on the potential impact of the shrinking global supply glut picture. True to our prognosis, CPO prices have surged by 33.6 per cent since that update (July-19 to date), benefitting from weaker crude palm oil supply, together with Malaysia’s and Indonesia’s B20 and B30 biodiesel mandates, which supported CPO demand growth.
“Ordinarily, better pricing in the global market should have dovetailed neatly into the domestic landscape. However, Nigerian CPO producers suffered a material decline in prices over Q2’19. The global price pass-through to the domestic market returned in Q3-19, occasioned by the closure of the border in Nigeria, which led to a significant reduction in the illegal influx of CPO.
They, however, said that CPO operations in Nigeria are entering a new growth phase, with a total of about 9,000 hectares of mature plantation coming on stream between 2020 and 2021 – from Okomu Oil’s Extension II.
According to them, Presco Plc would also benefit from stronger volume growth, hinging their assumption on the expected 8,000 hectares of farm set to mature from the company’s Sakponba estate by the end of this (2020).
While arguing that the outlook is positive for both companies and other agriculture companies, the analysts said that the blend of higher CPO prices and stronger volume growth are short-to-medium term margin tail-winds.